Seal Beach sues oil producer, alleging millions in unpaid taxes

Does one of California’s biggest oil companies owe one of Orange County’s smallest coastal cities millions of dollars?

The question could be answered in court.

This month, Seal Beach, population 24,000, sued California Resources Corp., which describes itself as “the largest oil and natural gas producer in California on a gross-operated basis.”

The complaint seeks “a court’s order to stop CRC from operating without a business license and for the payment of back taxes,” according to Seal Beach City Atty. Craig Steele.

The lawsuit filed in Orange County Superior Court has yet to be served because of delays related to the coronavirus pandemic.

“Sometimes large companies feel like they can get away with not following the proper laws because we are a small City,” Councilman Thomas Moore wrote in an email. “I hope this sends a message that Seal Beach will not put up with that.”

For the past 18 months, prompted by research from an outside consultant, Seal Beach has been demanding CRC obtain a business license for its slant drilling operation that pumps crude from wells bottomed off the coast of the city to an oil processing island owned by and located in neighboring Long Beach. Started in 2005, the roughly 30 wells are bottomed within Seal Beach’s municipal boundary but are on land owned by the state that is leased to CRC.

CRC maintains it does not need a Seal Beach business license and points to past case law and the city’s own municipal code as its evidence.

The city previously said CRC owed more than $9 million.

“It is unfortunate that the City apparently intends to waste residents’ tax dollars on a meritless claim manufactured by a consultant the City retained under questionable circumstances,” Michael Mills, outside counsel for CRC, wrote in a statement.

Steele did not specify a dollar amount being sought and wrote: “The City will seek the full amount of the back taxes due for the oil CRC has extracted from the City, in an amount to be proved, as well as attorneys’ fees and costs of collection.”

After months of negotiations, the city set a March 31 deadline for CRC to get a business license and pay taxes due from September 2018 to the present “after which the city would agree to discuss the amount of back taxes due,” according to Steele.

The lawsuit came days after reports CRC was considering bankruptcy amid its rising debt and crashing energy prices. CRC issued a news release regarding the speculation that read, in part, “We will continue to consider all options with our advisors as we work through this unprecedented downturn.”

“That was part of the reason for taking legal action at this time,” Seal Beach Mayor Pro Tem Joe Kalmick said in a phone interview. “It protects our legal position if they do go bankrupt because we are suing them for back taxes.”

‘Free contract’

The city’s consultant is Laguna Niguel-based Greg Kirste doing business as Municipal Petroleum Analysts. In late 2017, Kirste told city leaders he had found millions of dollars in unpaid oil fees without publicly naming the sources.

Seal Beach was in a financial crisis. Leaders were talking about raising taxes and borrowing money from a community pool fund to hire police officers.

At the June 11, 2018, council meeting, city staff recommended hiring Kirste.

Kirste pitched his “free contract,” saying the city would not have to pay anything up front. His compensation would be 15% of whatever he collected for the city.

“It’s entirely free, unless I find something,” he said.

Then-Mayor Mike Varipapa was skeptical of the unusual contingency fee arrangement and concerned about Kirste’s lack of experience relative to other consultants.

“This isn’t small pocket change that we’re talking about,” Varipapa said. “This is big money that we’re going forward with.”

Some residents questioned why these unpaid oil fees were not revealed when Kirste was hired to audit the city’s oil businesses in 2013 and 2014. He noted he did obtain $200,000 from a delinquent oil producer to Seal Beach in 2014.

“I believe that everything that was asked of me during the contract was delivered,” Kirste said during a July 23, 2018, council meeting.

At that meeting, council hired Kirste by a 3-2 vote. Moore cast the deciding vote after Kirste’s contract was reworked to exclude Crimson Pipeline, a client of Moore’s employer.

Two months later, Kirste sent a letter to CRC arguing the oil company owed Seal Beach more than $9.3 million in fees, back taxes and penalties. The amount was based on calculations citing various parts of the municipal code. That included a portion that says the city’s tax collector may determine the amount of business tax owed by any business operating without a license.

CRC called the demand “bogus.”

By September 2019, Kirste said CRC owed more than $13.4 million which meant he stood to earn around $2 million.

‘There never was a pot of gold’

Seal Beach hired Kirste amid financial challenges, and its lawsuit comes during an arguably more severe economic crisis.

Voters approved a 1% sales tax hike in November 2018 that stabilized finances. With businesses now shuttered and people staying home, city coffers, which are deeply dependent on sales taxes and other declining sources, will likely take a hit.

“Every City in the U.S. is going to see revenue declines as a result of the COVID-19 pandemic and the City of Seal Beach is no exception,” Finance Director Kelly Telford wrote in an email.

Telford said her office plans to present projections of the economic impact of coronavirus to City Council on May 11.

Oil may flow into revenue

So, will Seal Beach see millions of dollars from CRC? Kalmick said we’ll know more once CRC is served and it may ultimately be up to a judge to decide.

“There never was a pot of gold, in my opinion,” Kalmick said.

He’s the only current council member who was not in office when Kirste’s contract was approved.

“From my perspective as the new person, it seemed like it was a bit overly optimistic to assume there was that kind of money there,” Kalmick said.

He expressed understanding for his colleagues: “I wouldn’t fault the council for getting wide-eyed.”

He said he voted to sue CRC not necessarily because of a potentially huge pay day but because “we should not let someone who is legally bound to pay a business tax not pay.”

“It’s about asking about what’s due us regardless the amount of money,” Kalmick said.

‘He has no knowledge of the City’s legal strategy’

While Kirste was instrumental in starting the legal fight against CRC, he has not been involved in negotiations for months.

According to Steele, Kirste is not authorized to speak to the press on behalf of the city.

“He has no knowledge of the City’s legal strategy, timing, theories or the remedies we will seek as we have not discussed any of that with him,” Steele explained. In a follow-up email, Steele said Kirste will likely be a witness in the litigation as his “records and research are relevant to the case.”

Kirste declined to comment, saying he was waiting to see the complaint first. But he did say that he had been authorized by the city to pursue a second source of unpaid oil revenue that he did not reveal.

Steele’s response: “I am not aware of any other verified revenue opportunities that Mr. Kirste has brought forward.”

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